Jump and variance risk premia in the S&P 500

Maximilian Neumann; Marcel Prokopczuk; Chardin Wese Simen

doi:10.1016/j.jbankfin.2016.03.013

Jump and variance risk premia in the S&P 500

Maximilian Neumann
, Marcel Prokopczuk^*
, Chardin Wese Simen

^*Corresponding author for this work

Research output: Contribution to journal › Article › Research › peer review

Abstract

We analyze the risk premia embedded in the S&P 500 spot index and option markets. We use a long time-series of spot prices and a large panel of option prices to jointly estimate the diffusive stock risk premium, the price jump risk premium, the diffusive variance risk premium and the variance jump risk premium. The risk premia are statistically and economically significant and move over time. Investigating the economic drivers of the risk premia, we are able to explain up to 63% of these variations.

Original language	English
Pages (from-to)	72-83
Number of pages	12
Journal	Journal of Banking and Finance
Volume	69
DOIs	https://doi.org/10.1016/j.jbankfin.2016.03.013
Publication status	Published - 1 Jan 2016

Keywords

Equity risk premium
Jump risk premium
Markov Chain Monte Carlo
Options
S&P 500
Variance risk premium

ASJC Scopus subject areas

Finance
Economics and Econometrics

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10.1016/j.jbankfin.2016.03.013

Cite this

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title = "Jump and variance risk premia in the S\&P 500",

abstract = "We analyze the risk premia embedded in the S\&P 500 spot index and option markets. We use a long time-series of spot prices and a large panel of option prices to jointly estimate the diffusive stock risk premium, the price jump risk premium, the diffusive variance risk premium and the variance jump risk premium. The risk premia are statistically and economically significant and move over time. Investigating the economic drivers of the risk premia, we are able to explain up to 63\% of these variations.",

keywords = "Equity risk premium, Jump risk premium, Markov Chain Monte Carlo, Options, S\&P 500, Variance risk premium",

author = "Maximilian Neumann and Marcel Prokopczuk and \{Wese Simen\}, Chardin",

note = "Funding information: We thank Carol Alexander, Mike Chernov, John Doukas, Andreas Kaeck, Bradley Paye (discussant), seminar participants at the Technical University of Munich and the Financial Management Association meeting (2014) for comments. We are particularly grateful to two anonymous reviewers for detailed suggestions. Marcel Prokopczuk gratefully acknowledges financial support from the British Academy. Part of this project was completed when Maximilian visited the University of Reading.",

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doi = "10.1016/j.jbankfin.2016.03.013",

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AU - Neumann, Maximilian

AU - Prokopczuk, Marcel

AU - Wese Simen, Chardin

N1 - Funding information: We thank Carol Alexander, Mike Chernov, John Doukas, Andreas Kaeck, Bradley Paye (discussant), seminar participants at the Technical University of Munich and the Financial Management Association meeting (2014) for comments. We are particularly grateful to two anonymous reviewers for detailed suggestions. Marcel Prokopczuk gratefully acknowledges financial support from the British Academy. Part of this project was completed when Maximilian visited the University of Reading.

PY - 2016/1/1

Y1 - 2016/1/1

N2 - We analyze the risk premia embedded in the S&P 500 spot index and option markets. We use a long time-series of spot prices and a large panel of option prices to jointly estimate the diffusive stock risk premium, the price jump risk premium, the diffusive variance risk premium and the variance jump risk premium. The risk premia are statistically and economically significant and move over time. Investigating the economic drivers of the risk premia, we are able to explain up to 63% of these variations.

AB - We analyze the risk premia embedded in the S&P 500 spot index and option markets. We use a long time-series of spot prices and a large panel of option prices to jointly estimate the diffusive stock risk premium, the price jump risk premium, the diffusive variance risk premium and the variance jump risk premium. The risk premia are statistically and economically significant and move over time. Investigating the economic drivers of the risk premia, we are able to explain up to 63% of these variations.

KW - Equity risk premium

KW - Jump risk premium

KW - Markov Chain Monte Carlo

KW - Options

KW - S&P 500

KW - Variance risk premium

UR - https://www.scopus.com/pages/publications/84979785015

U2 - 10.1016/j.jbankfin.2016.03.013

DO - 10.1016/j.jbankfin.2016.03.013

M3 - Article

AN - SCOPUS:84979785015

SN - 0378-4266

VL - 69

SP - 72

EP - 83

JO - Journal of Banking and Finance

JF - Journal of Banking and Finance

ER -

Jump and variance risk premia in the S&P 500

Abstract

Keywords

ASJC Scopus subject areas

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